The government’s sudden decision on Saturday to substantially close the border seems to have jolted some towards realising just how serious the coming economic dislocation is.   But it has also led to a plethora of comments suggesting that the “border closure” is itself the cause of, or trigger for, the dislocation and huge loss of income and output that is coming.  It wasn’t.  As is well known, willingness to travel internationally was drying up anyway, and was only likely to drop further, amid the progress of the virus and the skyrocketing levels of fear and uncertainty.  Only the marginal additional effect of the border closure, over and above what was already happening any way, is really relevant to assessing the cost of that particular policy.

Personally, I’m still a bit sceptical about border closures now, which seem more akin to political theatre than to serious policy (with hindsight the one –  simply impossible to conceive –  border closure that would have made sense would have been for China to have closed its border, in and out, in November).  But unless they distract attention, including media coverage and analysis, from the real and bigger issues I guess at this point they don’t do much harm either.

On the other hand, there has still been a real reluctance to grasp just how deep and long that economic shutdown/dislocation seems likely to be.  There was the absurdist extreme this morning of the (overwhelmed?) Reserve Bank Governor who was reluctant to even concede a recession.  But if the Prime Minister –  who is usually hopeless on matters economic, including in her Q&A interview yesterday –  and the Minister of Finance have been less bad than that, they’ve still refused to level with the public, in ways that leave one wondering whether even they have yet grasped what we’ve found ourselves in so quickly.

Thus, it was good on Saturday to hear the Prime Minister articulate the “flatten the curve” strategy, but neither she nor any other public figure I’ve seen or heard from has been willing to recognise that if we do flatten the curve a lot, whether by border closures or (more probably) physical distancing, there is no quick or easy exit strategy: in some form or another, perhaps varying through time, the restrictions and behavioural changes (compulsory or voluntary) have to be in place for a long time, unless/until (say) a widespread vaccine is available.    That means a huge economic cost, and huge economic uncertainty, for the (uncertain horizon) future.  Perhaps it is the only sensible strategy now –  notice the pushbacks against the UK “herd immunity”/cocoon the elderly notions – but how does it feel three months hence?  Six months?  Nine months?   There has been no open discussion of the exit strategy, or the implications economic and social.

It is pretty easy to develop scenarios in which real GDP for the next year could be 25 per cent lower than otherwise.   Foreign tourism has evaporated.  There’s 5.5 per cent of GDP gone.   Perhaps a few more people will holiday locally, but more likely reluctance to travel will keep on diminishing, even if we never quite get to the point of being penned in our homes, even just outside working hours.   No new investment project will start, and many of those underway will be halted –  whether because of uncertainty, illness, lack of finance, disrupted supply chains or whatever.  Housing turnover will dry up.  On the expenditure GDP side, investment is about 20 per cent of GDP.   Demand for many of our other exports will also weaken –  as most every other country battens down and experiences big income losses as well as disrupted distribution channels.  Personally, I went to a movie yesterday afternoon, but I doubt I’ll be going to any more for the duration.    Restaurant bookings in other countries are plummeting and so on.  Lock people down Wuhan style – or have them so fearful they won’t venture out –  and of course for a time the losses are even greater.

It is an enormous loss of income and wealth, most of which will never be recouped.  Those losses will be borne –  the only question is who bears them. That is likely to be some mix of law, canons of fairness/justice, and considerations of economics (what will help us eventually emerge with the least semi-permanent damage).

A key aspect of my approach to this issue is that now is not the time to be encouraging more spending and economic activity. In fact, to do so is likely to run directly counter to the public health imperatives.  There will come a time when we do want people to emerge from their shells and be ready, eager, and able to spend. But not only is that time not now, but a realistic take on what “flatten the curve” seems to mean here and abroad, suggests that at best that time will not not be for many months yet.

So talk of stimulus packages is really quite misplaced (much of the Australian package last week will have really just be wasted money).  The focus now needs to be on three things in my view:

• basic income support for everyone, whether through companies or through the welfare system,
• throwing all that can usefully be thrown at gearing up health system capability (I have no idea what can actually be done, but the impression so far is that not much has been done, perhaps so as not to muddy the waters of the political message about our “world-class health system”, when it is clear that no health system in the world can cope with very much of this virus at once –  another message politicians have not fronted the public with), and
• creating a climate of confidence that in time –  as soon as possible, but it won’t be soon – things will get back to normal, including economically, and that the authorities will not stint in helping that happen WHEN THE TIME COMES, which is not now, and cannot be now.  Included among the imperatives regarding confidence are things around medium to long term inflation expectations –  something the Bank used to like to talk about, until it really mattered – and the assurances it takes to create credit and liquidity available.

So here I want to propose a strategy or framework for approaching the period ahead, the period before there really is light at the end of the coronavirus tunnel.    When that light becomes evident, my suggestion of the temporary cut in the rate of GST would be apt, as would a temporary cut in one of the lower income tax bands.  A one-off significant lump-sum cash transfer might even have a place.   And monetary policy would have been fixed in ways that mean interest and exchange rates strongly accommodate any nascent uptick.

But in the meantime here is something along the lines of what I think needs doing.

First, people keep playing down just how much it matters that monetary policy cannot adjust very much.  Even in normal recessions, whether or in the US or elsewhere, cuts in short-term interest rates of 500 basis points or more are quite normal.   This economic dislocations seem almost certain to be larger than anything anyone living has ever experienced in countries with their own monetary policy.   We simply cannot accept the status quo of an effective lower bound on nominal interest rates not far below zero (let alone the rank incompetence that for now has the RBNZ telling us the floor is 0.25 per cent, because they hadn’t ensured banks could cope with negative rates).

This problem can be solved.  The effective lower bound arises because people- and institutions can convert deposits into cash, which yields zero, rather than accept a materially negative interest rate.  It isn’t worth doing so –  insurance, storage, AML laws etc –  for a few tenths of percentage points, but if the OCR were to be set at – 5 per cent (quite plausibly what would be sensible now: there are papers for the US in 2008/09 which suggested -5 per cent would be appropriate then) the general consensus is that such conversion would occur on sufficiently large scale to make it not worth cutting that deeply.

But those restrictions can be eased, temporarily or permanently.    If, for example, the banks had to pay a premium of 5 per cent over face value to purchase (net new) notes from the Reserve Bank, they’d be likely to pass that cost on to customers –  and particularly to any large customers.  If a pension fund (say, and I’m a trustee of two so have thought about these options) considered switching into physical cash and faced a 5 per cent fee, they’d have to think about how long they expected the crisis to last.  If they thought it would be largely over this time next year, you’d rather accept a -5 per cent interest rate in a bank that pay the insurance and storage costs on top of the 5 per cent cash fee.  It isn’t technically hard to do. It is pretty countercultural –  cash and deposits have been essentially interchangeable –  but then so is coronavirus and the attendant economic and social disruption.  There is a bunch of other ways of achieving much the same effect.  They can be done in fairly short order (and announced, for the signalling benefits) even sooner.

Doing so would help ensure we could keep driving the exchange rate down, (as the Governor put it) a standard part of the buffering mechanism in New Zealand.  And it would demonstrate to markets, and anyone else paying attention, that New Zealand authorities were absolutely determined to keep medium-term inflation up  –  in the face, for the next year or so, of an otherwise deeply deflationary shock –  which might even lift inflation expectations, but would at least limit further erosion.

This stuff is geeky and may not make much direct sense to the man in the street.  But it is a reallly important part of a successful macroeconomic framework.  It does not put money in pockets now, but it helps keep the climate right for an effective recovery.

And what it would do is enable us to make a much more brutal and effective start on the appropriate income redistribution to fit the crisis.  Interest rates are really a reward for waiting, and for the opportunities used/foregone over periods of time.  But for the economy as a whole there really is no value in time at present.  And yet we still have deposit and lending rates –  even after today’s cut –  well above zero.   That simply shouldn’t be for the time being.

Of course, there are arguments around negative rates that depositors won’t readily accept negative returns.  Those are arguments –  mostly about slow adjustment of norms –  for relatively stable times, not for the next year or so.    What else are the depositors going to do with their money?   Extreme risk aversion will deter them from purchasing other assets here, and if they either shift abroad or starting spending either effect works in the macro-stabilising direction.

And on the other hand, in deep recessions servicing burdens for floating rate debt typically plummet.  That seems even more imperative than usual (for a recession) now.

In other words, radically lower interest rates would (a) lower the exchange rate, (b) achieve a desirable and typical downturn redistribution from depositors to borrowers, and (c) help create the medium-term confidence in the rate of inflation once we’d emerged.  Those are significant gains even if  no more overall economic activity is induced right now in the midst of the crisis.

If the Reserve Bank won’t act to do this now –  and they’ve shown no sign of any energy thus far, including nothing more than a passing mention in last week’s speech –  the Minister of Finance should insist on it, using his existing monetary policy override powers or, if they aren’t enough, passing special legislation.

Consistent with this, the Bank should –  and quite possibly will within the next couple of weeks –  starting standing in the market offering to purchase any and all government securities at a yield of (for the sake of a round number) 0 per cent.    Doing so would not make much difference to short-run economic outcomes –  frankly little (other than the virus) will or really should – but it would be a strong signal of how committed the authorities are to avoiding a deflationary shock turned into a deflationary underemployed semi-equilibrium. It would also establish upfront that any bond market disruptions – and there may be more –  would not impede the government’s ability to raise whatever it takes over the period ahead.  (And for monetary tragics, yes wouldn’t Major Douglas and Bruce Beetham have marvelled to see such an hour).

The second strand of my adjustment package is a proposal for a wage cut, across the board, of (say) 20 per cent for the coming year.  Remember that I noted that GDP could easily be 25 per cent lower than otherwise for the year ahead.  Someone (lots of people) will bear that loss. Most owners of businesses/shares will take very heavy losses for the time being.   Many people face losing their jobs, or being unable to find one (at a mundane level my son, in Year 13, fairly suggested that finding a holiday job next summer, prior to starting university is going to be…..well, challenging).  They lose out very heavily (recessions never fall evenly).   And at the other extreme, who won’t be losing out at all?    That would be the 20 per cent of so of the workforce employed in the public sector, few or whom will face any material risk of redundancy. (And sure, some public sector workers will be working harder than ever, but so will some private sector workers –  and in case anyone thinks this is beating up on public servants, our main household income is a public service salary.)

In such a dramatic climate, across the board wage rates seem fair, as a way of distributing the (inescapable) losses and pain.   It would have to be done by legislation, which might not be that easy to draft, but it is one of those cases where centralised coordinating devices allow adjustments that couldn’t otherwise readily or quickly occur (the floating nominal exchange rate serves a similar function).

Now, of course the typical high income person can afford to lose 20 per cent of their wage for a year more readily than someone at the bottom.  But in a typical recession the labour income losses are concentrated even more heavily on low income people, so that isn’t a particular argument against what I’m suggesting.  But frankly most people are likely to be spending less anyway over the next year, even if it is just saving the bus fare if people are coming into the office less often (or not at all), or closed bars or movie theatres etc.  But one could tailor the scheme to some extent: perhaps a fulltime equivalent cut of 20 per cent to wage rates, but cappped at $4000 (FTE) for low income workers?

Now one loud objection will be that such a cut will be deflationary: less income, less spending etc.  But (a) I have another big strand to come, and (b) recall that this is mostly redistribution –  instead of most losses falling on firms, more of them would be borne by workers (being as we are all in this together).  And don’t forget that the first strand of my suite of framework policies was a radically expansionary monetary policy, relative to what we have now.

The third strand of my framework –  perhaps the most controversial of all –  starts from asking the question of what we’d have done 20 years ago if we’d really focused on pandemic risk, including at a macroeconomic level.  Presumably the answer is that we would have sought insurance.  It would not necessarily have been available on market – especially not from anyone we’d count on to be around to meet the claims – so we’d have self-insured.  In fact, in the sort of as-if argument favoured by economists you could mount an argument that that is exactly what we have done, across successive governments, by keeping government debt low (and taxes higher as a result –  in effect, the premium).  Now is the time to draw on the policy.

I should say that much of what I’m about to suggest sticks in the craw.  There are some firms that I really have no sympathy with at all: if you are an airline then after 20 years of 9/11,  SARS, H5N1 planning, H1NI, MERS, and the never-long-away risk of major new terrorism, you surely have to plan on the basis that sustained disruption in ability to fly is a core business risk.   But, even if politics didn’t mean any such argument would just get ignored anyway, I think we have to set such perspectives aside, in the interests of a timely restoration when the virus fades as an issue/risk.

At a conceptual level, I am going to propose something like an “ACC for the national economy”.  ACC, you will, recall typically cover 80 per cent of lost earnings.

So how about committing as a country, and by law now –  would be needed to have the effect I’m seeking – that for the tax year 2020/2021 – we would guarantee that everyone taxpayer’s net income would be at minimum 80 per cent of what they received in 2019/2020.  That guarantee would apply to firms and individuals, even foreign-owned firms with substantial operations actually here. (For firms, it might be conditional on –  and scaled to – maintaining at least 80 per cent of the 31 Dec 2019 workforce.)

I’m not here proposing a mechanism to operationalise the payouts of these guarantees, but I don’t believe that would be necessary now.  It would, in effect, be akin to a government bond or guarantee which people and firms could count on and –  as important – their banks could count on.    With such a guarantee, there would be less reason for banks to be reluctant to keep existing loans outstanding, or indeed to extend further credit to cope with the –  often significant cash flow hole.    It wouldn’t avert all failures –  and nor, generally, would that be desirable –  but it would make a huge difference, and provide a high degree of certainty about income floors up front.

The guarantee doesn’t, of course, make people whole (not adversely financially affected) but then all this is on the assumption that 25 per cent of GDP is lost.  Those losses have to be borne by someone (and, as noted above, spending opportunities are going to be fewer anyway).

Recall again that the goal isn’t, and should not be, to stimulate new spending at a time when people have to hunker down, be careful, separate etc.  It is about minimising the longer-term disruption from a totally unforeseen, genuinely exogenous to the New Zealand economy shock.   Done well, firm failures and job losses –  at least of permanent employees –  should be kept to a minimum (as will inevitably be the case in the core public sector anyway), and keeping up something like the required level of credit (much of any addition, secured by a statutory government commitment).   Same applies to household mortgages.

How much would it cost?   It is impossible to tell.  But here’s the thing.  On the OECD net general government financial liabilities series, New Zealand’s net government debt is about 0 per cent of GDP.  That’s right, zero.

Suppose we lose 25 per cent of GDP for a year, but decide to pay every New Zealander (individual and firm) just what they got the previous year, what would that leave net government debt at the end of that year?  Well, that would be something like 25 per cent of GDP.  Not exactly high by international standards, having traversed one of the very worst shocks imaginable outside war.  Of course, the lost output could be larger than 25 per cent of GDP (in Wuhan it will almost certainly have been larger than that so far), or the losses could run longer than a year.  But worry about the second year when we get closer.  For now, an strong demonstrated fiscal commitment should support both credit and jobs.   And, as a society, we pay for it in higher taxes over the following 20 or 30 years.   It is, essentially, ex post pandemic insurance.

(If you wanted you could add some sort of “windfall profits tax”, levying a higher tax rate this year on anyone whose income in 2020/21 was more than 20 per cent higher than in the previous year.)

And that it is it for a big macroeconomic framework package.  It doesn’t obviate lots of short-term issues, including perhaps around sick leave etc. It doesn’t render irrelevant series stimulus effects –  fiscal and monetary – to demand and activity as the virus looks to be sustainably behind us.  What it is designed to do is (a) share the inescapable) losses fairly, if inevitably a bit crudely, without removing all risk from individuals or firms (b) support the existing level of credit and a secure basis on which existing banks could lend to cover shortfalls, (d) dramatically cut servicing burdens (and returns to depositors) as is normal in a deep recession ,and e) support/create confidence in an absolute commitment to keep medium-term inflation up at around 2 per cent, avoiding seeing real interest rates rising into a savagely. deep and at least somewhat prolonged recession and deflationary shock.

I’m sure there are many detailed pitfalls and issues to address.  Perhaps the biggest high level one is the possibility this is all over three or six months hence.  Frankly, I don’t even think that is really worth considering very seriously at present, but even if it were to happen (a) the wage cut could be shortened (new legislation) and (b) the net income guarantee is just that: if it isn’t called because incomes recover very quickly, then that is just great for firms, households, individual and governments.

I commend it to your consideration.

A couple of weeks ago I signed up to follow the Ministry of Health on Twitter.  Seemed a sensible thing to do: coronavirus and all that.

Since then I’ve been interested to watch their messaging very slowly change.  Two weeks ago (28 February) was when the first New Zealand confirmed case was announced.   We got this

By the next day they were so relaxed about the virus they took to tweeting woke public service stuff

Pretty sure that even then the disease had killed a lot more people than “fears, rumors & stigma”, but…well…presumably that wasn’t Dr Bloomfield’s view.

On 1 March, we had the “wash your hands” message

and there wasn’t anything on 2 March.

But by 3 March, it was time for some more off-topic political rhetoric from another government agency. the Ministry retweeting this.

Here was the 4 March messages

Never have they given us anything substantial to justify their view that the “risk of widespread community outbreak” not only is low, but is expected to remain low.   Small matter of all those other countries, including ones that had much the same border restrictions we did.

By 5 March we had

Probably (a) really up to the public, and (b) any reviewers when this is all over, to decide whether things are being well-managed, but we know that the Ministry’s prime communications objective (stated in the pandemic plan) is to maintain confidence in themselves, whether justified or not.

Also, much as we might sympathise with that family, surely the Ministry of Health’s prime task isn’t those individuals but the safety and wellbeing of the wider public?

There wasn’t anything much on their feed for a few days, but then there was this

Which displays no sense that the Ministry recognises that while it knows about the cases it knows about, it doesn’t know what it doesn’t know. There was also this.

Given the rate at which the virus was spreading globally, it wasn’t clear quite what evidence they had for their misinformation claim.

(Although perhaps they had in mind the Director-General’s several claims around the time that asymptomatic transmission of the virus simply isn’t a thing, a stronger statement that what was made in the WHO report he claimed to draw on, and not consistent with the views of a bunch of other international experts.)

And by 10 March we have this

Talk about confidence: “just wash your hands and don’t worry”.   Oh, and by the way we are so confident there is no risk that they actively advise people not to “stock up”  (not even just “not panic buy”).  I imagine most people have done as I have and ignored their advice.  After all, wouldn’t want chaos in supermarkets if/when community outbreak becomes a thing or when much greater social distancing is mandated.

Here they are on 11th. Public events finally come into view.

Then yesterday, there was a change of tack from the Ministry

The “risk is low” message had been dropped, and the asymptomatic transmission message had been toned down.

And what of today, the 13th?

The ground seems to have shifted quite a bit.  No attempts to downplay risks, no reaffirmation of the risks being low, just some advice about hygiene etc things to think about in deciding whether or not to go.

And to read Dr Bloomfield’s press release today there is also quite a different tone coming through

“Our key advice, which is fundamental to our response, is not putting yourself or others at risk if you are unwell. This means not going to work or going to places where there are other people if you are sick. All of us have a role to play in stopping further spread. I need to emphasise how critical this is as New Zealand responds to COVID-19,” says Dr  Bloomfield.

‘This is particularly important for concerts and other large gatherings we have coming up, including this weekend. Please stay home if you’re unwell.’

Having said that, I went and looked at the Ministry’s website, and there it still says

With continued vigilance the chance of widespread community outbreak is expected to remain low.

But with not a single sentence to justify the Ministry’s view.

People seem to speak highly of Bloomfield. Personally, I tend to be a bit sceptical of anyone appointed by Peter Hughes (State Services Commissioner) and as a mere curious citizen haven’t seen anything much to allay my unease in the last couple of weeks.  In its public communications, the Ministry seems constantly to have been playing down risks as much as they can –  even as the global situation deteriorates rapidly, and Australia’s situation worsens.    It seems fundamentally unserious and it seems not at all consistent with the ideas of an open society, transparency and challenge.    And frankly it undermines confidence in whatever the Ministry will be saying through the next phases of this crisis.  Whatever actual expertise some of them no doubt have, they risk coming across as unserious and not interested in levelling with the public.  (Same goes for some of Bloomfield’s comments about some east Asian countries that seem to have checked their outbreaks for now: no sense of engaging with the public as to what it would take (resources, commitment, compliance etc) and for how long, to even hope to emulate those stories).

Wouldn’t it have been good to have seen the Director-General engaging on, for example, the deterioration in the Australian numbers, directly confronting the facts that (a) there is an open border between the two countries, and (b) a fair amount of travel each way all the time and addressing the implication that we might, in effect, really be considered as being in a Common Virus Area with Australia.  If so, the complacency about New Zealand risk might be particularly worth challenging.

And wouldn’t it be good if Bloomfield –  or the Minister of Health or the Prime Minister –  fronted with the public about the very real challenges the health system will face if we get a serious outbreak here (low number of ICU beds per capita, looking at the Italian experience etc).  That is what good, honest, effective-over-time communicators would do. It is the sort of thing that over time builds confidence: a view that, for example, while officials may be optimistic now (rightly or wrongly) they have thought hard about what might happen, and aren’t just trying to sugar-coat their messages and keep the public quiescent.

Wouldn’t it be good if they could effectively and openly articulate for the public the “flatten the curve” strategy that drives so much of what is going on?

I really hope that what we don’t see is better than what we are seeing.  Because what we are seeing seems complacent and uninterested in genuine openness and engagement.  And that is no way for a democratic society to be operating, in which we simply defer to officials, take what they tell us only when they tell us, and not bother our pretty little heads about other stuff.

Here in New Zealand we are waiting for the details of the government’s promised economic package, which –  we are told –  will be tightly targeted and focused on the industries that particularly suffered from coronavirus.

Even to write that sentence, is to recognise how absurd a position the government has put itself in.     They seem –  no real doubt about it, their own words say as much –  focused almost wholly on the firms/sectors that suffered from China’s experience with the coronavirus, even as something so much bigger is already beginning to sweep over us.  China, after all, if not remotely back to normal, is offering practical assistance to Italy.   That outlook was something the Minister of Finance and, even more so, the Prime Minister have consistently refused to face.  Perhaps they’ve known it internally –  there must, surely, be some good adviserssomewhere –  but nothing they’ve said in public has prepared New Zealanders for the reality of what is unfolding, and what is likely to happen in the coming weeks and months.  (Our media don’t seem that much better: the Herald today has a full page story on the front cover “The World Faces Reality”, but readers will still have little or no sense that the economies of many countries are about to substantially shutdown.)

Whether or not we get serious outbreaks here –  and who aside from the Ministry of Health would be willing to punt on us not – the New Zealand economy will be severely –  really really severely –  adversely affected.   And there is very little that economic policy tools, macro or micro, can do to lean against or mitigate that loss.  Economists have talked for years about the benefits of exchange, specialisation, personal interactions etc etc.  But for the next few months the emphasis seems likely to be increasingly on keeping your distance, hunkering down.    Huge amounts of output just are not going to happen, and there will be hardly a firm or sector not really severely adversely affected.

Whether or not the government’s plans were reasonable when they were first being conceived –  and just perhaps they might have been six weeks ago –  surely now is the time to bin that package they were planning to announce next week.  They need to start over, facing the reality now before us, not the (now rather limited) shock that first faced us (and certainly hit some individual sectors hard).

Sensible policy responses now –  whatever they choose to do around further border closures –  look much more appropriately focused on immediate crisis management.  In other words:

• ensuring the income support is going to be readily and effectively available for the many (especially low income) people who won’t be able to work from home or who will have exhausted their sick leave (and any ex gratia generosity employers may still be able to offer). That might require legislation: if so, pass it,
• ensuring that the food distribution system is going to be reasonably robust if we go through closed-down periods (in an early post here, I recounted an anecdote from an early phase of pandemic planning that scared me then: big supermarkets typically only have 1.5 days of sales in stock at any one time),
• spending/doing whatever can still usefully be done to prepare for possible severe health system stresses (rather than just happy talking the public about how well prepared they are –  for 100 cases I’m sure, but not for several thousand).

and so on.

Now, sure there are probably other things to do.  The Reserve Bank should be cutting the OCR (for all the reasons I outlined yesterday) and they need to be prepared to roll out liquidity support type operations if financial sector funding stresses start affecting banks here.

But you simply cannot plan to target individual firms, when almost every firm is going to be engulfed.  It would inefficient, unmanageable, and would simply to fail to recognise the magnitude of the coming losses.

And there is no point in thinking of huge fiscal outlays, as general stimulus, right now.    If the government was going to plan to actually purchase physical goods and services well (a) what would it do with them?, and (b) soon enough, the capacity of the economy to deliver much (workers at work, functioning distribution systems) are going to be severely impaired.  And – the more likely option –  simply putting money in people’s pockets, whether by cash grants or tax cuts (GST or low income thresholds on income tax) aren’t likely to achieve much systematically useful either.   For a start, if you are sensible then in such a climate you won’t want more people eating out (say) or moving around holidaying, or going out to big sports matches or concerts (classic discretionary items).  And even if online retail really was still fully functional locally, it just isn’t that large a share of New Zealand retail.  More generally, quite-rational fear and uncertainty about the future will have people pretty reluctant to spend anyway.   That is sensible and prudent, and not really something governments should now be trying to undo –  even if our happy-talking Prime Minister was the other day encouraging people just to go out and spend.       We need to start thinking in terms of the deepest contraction in economic activity any of us –  except perhaps the handful still alive who experienced the Great Depression-  have ever seen.  It is the price the world is going to pay to “flatten the curve” (something we’ll come back to).

Big stimulus is probably going to be appropriate and required as and when the worst of the virus is past us, and people are genuinely and rationally able to see some light at the end of all this, building on the fundamentals already at work by then, speeding up the recovery.  Ideally, that would be a mix of fiscal and monetary policy, bending over backwards to help get economic activity levels back to normal.  So use the time now –  you’ll have plenty –  to prepare for that sort of strategy  (and perhaps for the inevitable bailouts and recapitalisations our politicians will find themselves unable to resist –  anyone suppose that if it comes to that governments of either stripe would let Air New Zealand fail (but I hope at least they wipe out the private shareholders if it does happen)).   It might even be time to consider changing a few individuals at the top (poor generals are found out in wartime and, in good armies, quickly replaced).

On the fiscal side, make sure  –  for example –  that a universal lump sum cash payout to all residents could be made (from the outside hard now to see how it could be done).  Ensure that a temporary GST cut could be implemented quickly and smoothly.  And insist that the work is done to largely remove the near-zero effective bound on lower interest rates. It can be done  –  it should have been done, here and abroad, five years ago –  and failure to act will simply unnecessarily hold back eventual recovery (and reinforce those downside risks to inflation expectations that I’ve often worried about here).

One of the key things we all have to recognise is that this situation is not going to be resolved any time soon.  For hints of that we can look to China.   Sure the new case numbers and new deaths have come right down –  more infections this week, I think, from arrivals from other countries than locally –  but nowhere are things back to normal. In Wuhan it seems that recovery has barely even begun.  Look at successive waves of things like we are now seeing on Italy –  or early signs in other countries too –  and there is going to be no confidence (including about travel) and no certainty for a long time.

But perhaps even more importantly, remember that the virologists etc talk about the goal of current interventions being to “flatten the curve” .  This is perhaps the best version of the stylised chart I’ve seen, in a new article from the economist Richard Baldwin.

Perhaps it is a little cluttered, but it is trying to convey a lot of information.

The solid red line is a stylised representation of how new case numbers would look if there was no containment (given that there is no effective treatment).  You’ll have heard of experts talking of how if that happened perhaps 50 per cent of the world’s population would be infected before too long, since none of us has any natural immunity and the virus seems to spread easily.

The real worry in that scenario is the dotted red line –  people needing ICU-level care.   And this perhaps is where the chart is too sanguine.  On this version, the area under the dotted red line, and yet above the ICU bed capacity, is small relative to the total ICU demand.  But if 5 per cent of cases need ICU-level care (seems about right from what I’ve read) then it is worth remembering that New Zealand, for example, has about 175 ICU beds.   Perhaps with valiant efforts those numbers could be doubled in an emergency –  but doctor numbers can’t – but even that would mean that, if no one else was in an ICU bed at all, our system would be overwhelmed at 7000 cases at the same time (5 per cent of 7000 being 350).  That might seem a lot of cases, but recall that 50 per cent of New Zealand’s population is 2.5m people.

So trying to flatten out the curve is about trying to avoid the forced medical rationing already evident in the high-quality northern Italy health system and, presumably in the process, reduce the overall death toll (very old people will get treatment and as a result some will live who might otherwise have to be left to die). If the curve could be flattened out, by aggressive containment etc measures, the aim –  highly stylised –  is to produce something like blue line, where the ICU demand never quite exceeds the physical capacity.

But what isn’t often mentioned –  although it is quite clearly implicit in the stylised chart –  is that the aggressive containment measures don’t necessarily alter the likelihood that –  at least unless there is a widespread vaccine available next year –  many of us will still get it in the end (something like 50 per cent is still the number  – the sort of thing Angela Merkel said to the German people the other day).  It is just a matter of time, of stretching things out, and (thus presumably) of repeated waves or outbreaks in different physical locations.  Take Italy as an example, the current situation looks horrendous, but case numbers are not even close to 1 per cent of the population.

And, unless that narrative changes markedly as we learn a lot more, that seems likely to be the sort of scenario every country faces, in one form or another, for the time being.  There is nothing to suggest –  since no likelihood of a vaccine in that time –  that the problems/risks/disruptions will ease this year.  And the end of the year is still 9 months away.   Turning back to the economics, a great deal of economic output and wealth can, and probably will, be lost in that time.  It means –  sadly –  that there is likely to be plenty of time to think about planning for serious stimulation as we get to a recovery phase.   How many people are going to be keen to book travel, even if borders stay open or re-open and flights are still there?  How many people are going to be keen to spend (precautionary savings will look very rational for many if they still have an income)?  And who is going to be ready to commit to start investment projects, even if either debt or equity funders were willing to release the funds needed?

It isn’t hard at all to see New Zealand’s GDP for the rest of the year being perhaps 10 per cent lower than otherwise (that isn’t a forecast, just an attempt to suggest that the ballpark numbers people should be working with are very very large.  That alone would $25 billion of income lost that is mostly never coming back – even if next year we resumed the pre-crisis growth/income path – and losses which have to be (a) borne and (b) distributed. There will be significant business failures. There will be heavy job losses.  And, despite my scenario, it is not as if anyone –  government or private –  can safely plan on the losses being limited to this year and everything being pretty much normal thereafter.

There is a pressing need for the Prime Minister and the Minister of Finance to get real about the magnitude of the economic (and probable social) disruption we are going to face, the price we pay –  even though much of it will be out of New Zealand’s control –  to manage the virus.  Front the public and explain why now is no time for a limited backward-looking package, but for something much more dramatic and whole-of-nation crisis focused, with a time horizon that stresses that “normal” will almost certainly be some considerable time away.